SEC Dropped the Ball on Backdating Fraud Probe

WASHINGTON (CN) – The Securities and Exchange Commission can not pursue most of the charges it filed against the former chief executive and financial officers of Microtune for their alleged role in illegal backdating of stock options, a federal judge in Dallas ruled, finding that the statute of limitations had run out.

The SEC sued Douglas Bartek and Nancy Richardson, CEO and CFO, respectively, in 2008, alleging that they had backdated stock options for employees beginning in 2000 and then had tried to cover up their crimes. Bartek and Richardson asked U.S. District Judge Jane Boyle to dismiss most of the charges against them, arguing that the statute of limitations on the alleged violations had run because the SEC was aware, or should have been aware, of any stock option backdating when it investigated Microtune in 2000 during its initial public offering. The SEC argued for suspension of the statue of limitations because fraudulent concealment obstructed its investigation. The agency said that the executives’ fraud was inherently self-concealing. Boyle disagreed, noting that as early as 2001 the SEC had evidence of the backdating in the form of an e-mail Bartek sent to a Microtune employee informing him that “tricks on timing” had been performed to backdate stock options so that the they were “already almost $8 in the money!” The SEC did not act on the e-mail, waiting until 2006 to launch a formal investigation. Microtune itself had informed the agency in 2003 that it suspected irregularities in the dating of stock options. The SEC said it was waiting until Microtune completed an internal investigation. Boyle did not accept the commission’s argument. “While perhaps an understandable method of allocating commission resources, such justification does not excuse the SEC’s apparent inactivity from mid-2004 to mid-2006, when further investigation would have uncovered the full extent of Microtune’s backdating and would have allowed the SEC to bring a complaint against Microtune much earlier than 2008,” the judge wrote. Amid these factors, the SEC had failed to show that “it diligently pursued its claim once it received the tricks on timing email on August 26, 2003, and the SEC is therefore not entitled to tolling under the fraudulent concealment doctrine,” Boyle wrote.